N-CSR 1 a2129224zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-21342 --------------------------------------------- Lehman Brothers/First Trust Income Opportunity Fund -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 399 Park Ave., New York, NY 10022 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Bradley Tank, Chief Executive Officer of Lehman Brothers Asset Management Inc. 399 Park Ave., New York, NY 10022 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (212) 526-7000 ---------------------------- Date of fiscal year end: 12/31/2003 --------------------------- Date of reporting period: 07/28/2003-12/31/2003 --------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. The annual report is attached. ANNUAL REPORT 2003 Lehman Brothers First Trust Income Opportunity Fund [GRAPHIC] [LEHMAN BROTHERS LOGO] CONTENTS Chairman and President's Letter 2 Portfolio Manager's Report 3 Fund Overview 4 Schedule of Investments 5 Notes to Schedule of Investments 13 Statement of Assets and Liabilities 14 Statement of Operations 15 Statement of Changes in Net Assets 16 Financial Highlights 17 Notes to Financial Statements 18 Report of Independent Auditors 21 Dividend Reinvestment Plan (Unaudited) 22 Trustee and Officer Table (Unaudited) 23
CHAIRMAN AND PRESIDENT'S LETTER Dear Shareholder: We are pleased to present our first report to shareholders of Lehman Brothers First Trust Income Opportunity Fund (NYSE: LBC). Although it is a short reporting period, the Fund is off to a very good start. During the period, the Fund achieved several milestones. We launched and closed our common equity offering in July 2003. We continued with a successful launch of preferred shares, on schedule, in October 2003. And perhaps most importantly, the favorable market environment for high yield investments combined with sector and securities selections by the portfolio management team allowed us to achieve an appreciation in the Fund's net asset value while maintaining a steady annualized dividend rate of 11% on the $15 common share IPO price. As you know, the Fund's investment objective is to seek high total return through a combination of income plus capital appreciation. The Fund pursues this investment objective by investing primarily in high yield debt securities. During 2003, the high yield market performed favorably providing investors with attractive relative yields and capital appreciation. We believe that the high yield asset class can continue to offer investors distinct benefits including high current income and opportunities for portfolio diversification. In today's low interest rate environment, high yield securities can offer attractive absolute yields relative to other asset classes. In addition, since the returns of high yield securities have typically been only partially correlated with returns of traditional stocks and higher grade bonds, an investment in the high yield market can potentially provide diversification to an investor's portfolio. Lehman Brothers Asset Management Inc., the adviser to the Fund, has retained Lincoln Capital Fixed Income Management, LLC (a wholly owned subsidiary of Lehman Brothers) as the sub-adviser to manage the Fund. Portfolio manager Ann H. Benjamin and her team of seasoned investment professionals at Lincoln Capital manage the portfolio. A review of the portfolio's performance and Ann's outlook for the high yield markets may be found on the following page. Ann and her team take a proactive approach to high yield asset management and integrate detailed security and industry analysis within the context of a global economic outlook. Ann's research analysts are industry specialists who carry out independent primary research on companies and industries. In addition to seeking value from specific issue selections, they also implement strategies seeking to take advantage of valuation opportunities across industry sectors and credit quality tiers. We hope that the Lehman Brothers First Trust Income Opportunity Fund will become a mainstay holding in your portfolio. We thank you for your trust in Lehman Brothers Asset Management and Lincoln Capital. We will work diligently to keep earning it. Sincerely, /s/ Kurt A. Locher /s/ Brad Tank Kurt A. Locher Brad Tank CHAIRMAN AND TRUSTEE PRESIDENT LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 PORTFOLIO MANAGER'S REPORT We are pleased to report that Lehman Brothers First Trust Income Opportunity Fund generated a positive return for the period July 28, 2003 (the inception date of the Fund) through December 31, 2003. Generally, the high yield asset class outperformed all higher quality bond indices for the reporting period. Over this reporting period, the Fund's performance was driven by an overweight in the Cable and the Wireless Communications sectors, both of which performed relatively well during the period. Also contributing positively to the Fund's return were issue selections in the Healthcare, Gaming and Metal and Mining sectors. During August, we added leverage to the Fund and sought to take advantage of the extremely low valuations in lower quality issues. Those issues drove performance late in the year. We believe our intensive credit evaluation process, coupled with our relative value analysis, will continue to help the Fund seek to achieve its high total return objective. We believe economic conditions will improve throughout 2004, fueled by a rise in capital spending. Our outlook for the high yield market remains positive. Over the course of the coming year, we expect corporate default rates to decline, and earnings and credit quality to improve. As the economy improves, there may be slight increases in interest rates; however, we do not believe this will negatively impact the high yield market. In fact, on a historical basis, high yield securities have generally outperformed higher quality securities in a rising interest rate environment. We have positioned the Fund with an emphasis on lower quality securities and higher coupon callable securities, both of which we believe can outperform the overall high yield asset class. The holdings of the Fund remain diversified across the quality spectrum among high yield grades, industries and individual companies. We maintain important holdings in the Cable, Wireless Communications and Chemical sectors, all of which we believe can outperform as the economy expands. Other important holdings include securities in the Healthcare, Metals and Mining and Gaming sectors. As always, we seek to invest in those companies with strong management teams and improving fundamentals and securities with good relative value. By investing in this manner, we seek to provide high total returns for our shareholders. Sincerely, /s/ Ann H. Benjamin Ann H. Benjamin PORTFOLIO MANAGER 3 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND FUND OVERVIEW (AS OF 12/31/03) PERFORMANCE HIGHLIGHTS(1)
JULY 28 - OCTOBER 1 - CUMULATIVE TOTAL RETURN INCEPTION DATE SEPT 30, 2003 DECEMBER 31, 2003 SINCE INCEPTION(2) ----------------------------------------------------------------------------------------------------------------------- NAV 07/28/03 4.45% 7.93% 12.73% ----------------------------------------------------------------------------------------------------------------------- Market Price 07/28/03 -0.01% 10.48% 10.47% -----------------------------------------------------------------------------------------------------------------------
FUND FACTS Ticker NYSE: LBC --------------------------------------------------------------------- Market Price $15.91 --------------------------------------------------------------------- Net Asset Value (NAV) $15.51 --------------------------------------------------------------------- Premium 2.58% --------------------------------------------------------------------- Shares outstanding 12,230,942 --------------------------------------------------------------------- CUSIP number 525178 10 9 --------------------------------------------------------------------- Inception Date 7/28/03 ---------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS Portfolio Turnover 32.08% --------------------------------------------------------------------- Expense Ratio(3) 1.42% --------------------------------------------------------------------- Wtd. Avg. Maturity 6.75 Years --------------------------------------------------------------------- Average Coupon 9.65% --------------------------------------------------------------------- Average Credit Quality B --------------------------------------------------------------------- Portfolio Composition (% High Yield) 98.5% ---------------------------------------------------------------------
CAPITAL STRUCTURE AND LEVERAGE ($ MM) Total Net Assets $279.7 --------------------------------------------------------------------- Net Assets Attributable to Common Shares $189.7 --------------------------------------------------------------------- Net Assets Attributable to Preferred Shares $90.0 --------------------------------------------------------------------- Net Assets Attributable to Other Borrowings - --------------------------------------------------------------------- Leverage (% of total net assets) 32.2% ---------------------------------------------------------------------
[CHART] CREDIT QUALITY BREAKDOWN (% OF TOTAL INVESTMENTS AND CASH) A 1.4% BBB 3.4% BB 33.1% B 42.3% CCC 16.9% CC 0.6% Not Rated 2.2% Cash 0.1%
[CHART] MARKET PRICE AND NAV PERFORMANCE
PRICE ($) NAV ($) PREMIUM/DISCOUNT (%) 7/29/2003 $ 15.00 $ 14.30 4.90% 8/8/2003 $ 15.00 $ 14.16 5.93% 8/15/2003 $ 15.10 $ 13.98 8.01% 8/22/2003 $ 14.56 $ 14.39 1.18% 8/29/2003 $ 14.45 $ 14.60 -1.03% 9/5/2003 $ 14.75 $ 14.75 0.00% 9/12/2003 $ 14.83 $ 14.93 -0.67% 9/19/2003 $ 14.82 $ 14.90 -0.54% 9/26/2003 $ 14.78 $ 14.92 -0.94% 10/3/2003 $ 14.93 $ 14.87 0.40% 10/10/2003 $ 15.14 $ 15.00 0.93% 10/17/2003 $ 15.10 $ 14.95 1.00% 10/24/2003 $ 15.23 $ 14.80 2.91% 10/31/2003 $ 15.25 $ 14.88 2.49% 11/7/2003 $ 15.27 $ 14.94 2.21% 11/14/2003 $ 15.48 $ 15.01 3.13% 11/21/2003 $ 15.14 $ 14.99 1.00% 11/28/2003 $ 15.26 $ 15.06 1.33% 12/5/2003 $ 15.36 $ 15.34 0.13% 12/12/2003 $ 15.32 $ 15.43 -0.71% 12/19/2003 $ 15.43 $ 15.60 -1.09% 12/26/2003 $ 15.49 $ 15.46 0.19% 12/31/2003 $ 15.91 $ 15.51 2.78%
[CHART] TOP INDUSTRIES (% OF MANAGED ASSETS) Media Broadcasting & Publishing 16.5% Telephone Systems 12.3% Entertainment & Leisure 10.2% Electric Utilities 9.8% Forest Products & Paper 6.5% Oil & Gas 5.6% Health Care Providers 5.0% Transportation 4.0% Commercial Services 4.0% Metals 3.8% Other 22.3%
[CHART] MATURITY BREAKDOWN (% OF TOTAL INVESTMENTS AND CASH) 1 Year 0.1% 1-3 Years 3.2% 3-5 Years 11.4% 5-7 Years 45.2% 7-10 Years 37.5% 10+ Years 2.6%
---------- 1. Performance for NAV and Market Price assume reinvestment of all dividends and capital gains. Shares of the Fund fluctuate in value. Fund performance changes over time and currently may be different from that shown as of 12/31/03. Past performance is no guarantee of future results. 2. Not annualized. 3. Annualized. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT -- 137.9% OF TOTAL NET ASSETS -------------------------------------------------------------------------------------------------------------------------------- AIRLINES -- 2.1% $3,750,000 Delta Airlines, Inc., Series 2000-1, Class A2 7.570%, 11/18/2010 A Baa NR $ 3,884,788 APPAREL RETAILERS -- 0.5% 1,050,000 Payless Shoesource, Inc., Senior Subordinated Note 8.250%, 8/01/2013 B B NR 1,010,625 BEVERAGES, FOOD & TOBACCO -- 2.7% 1,000,000 Del Monte Corp., Senior Subordinated Note 8.625%, 12/15/2012 B B B 1,095,000 2,000,000 Dole Food, Inc., Senior Note 8.625%, 5/01/2009 BB B NR 2,195,000 1,850,000 Nash Finch Co., Senior Subordinated Note 8.500%, 5/01/2008 B B B 1,850,000 5,140,000 CHEMICALS -- 5.5% 3,875,000 Equistar Chemicals, LP/Equistar Funding Corp., Senior Note 10.625%, 5/01/2011 BB B B 4,281,875 2,000,000 Methanex Corp., Senior Note 8.750%, 8/15/2012 BBB Ba BBB 2,230,000 2,000,000 Millennium Chemicals, Inc., Senior Note 9.250%, 6/15/2008 BB B NR 2,180,000 1,775,000 Resolution Performance Products LLC/Resolution Performance Products Capital Corp., Senior Secured Note 9.500%, 4/15/2010 B B NR 1,801,625 10,493,500 COAL -- 0.8% 1,550,000 Massey Energy Co., Senior Note, 144A 6.625%, 11/15/2010 BB Ba NR 1,588,750 COMMERCIAL SERVICES -- 5.6% 2,000,000 Alderwoods Group, Inc., Note 12.250%, 1/02/2009 NR NR NR 2,250,000 1,000,000 Allied Waste North America, Inc., Senior Note 7.875%, 4/15/2013 BB Ba NR 1,082,500 2,100,000 Allied Waste North America, Inc., Senior Secured Note 8.875%, 4/01/2008 BB Ba NR 2,352,000 2,825,000 Muzak LLC/Muzak Finance Corp., Senior Note 10.000%, 2/15/2009 B B NR 3,008,625
See accompanying notes to financial statements. 5 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND SCHEDULE OF INVESTMENTS CONTINUED DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL SERVICES - CONTINUED $2,000,000 Muzak LLC/Muzak Finance Corp., Senior Subordinated Note 9.875%, 3/15/2009 CCC Caa NR $ 1,932,500 10,625,625 COMMUNICATIONS -- 3.2% 750,000 Avaya, Inc., Senior Secured Note 11.125%, 4/01/2009 B B NR 877,500 2,000,000 Hexcel Corp., Senior Subordinated Note 9.750%, 1/15/2009 CCC Caa NR 2,095,000 1,000,000 L-3 Communications Corp., Senior Subordinated Note 7.625%, 6/15/2012 BB Ba NR 1,083,750 2,000,000 Nortel Networks, Ltd., Note 6.125%, 2/15/2006 B B NR 2,025,000 6,081,250 CONTAINERS & PACKAGING -- 2.4% 75,000 Crown European Holdings SA, Senior Secured Note 9.500%, 3/01/2011 B B NR 84,937 1,000,000 Crown European Holdings SA, Senior Secured Note 10.875%, 3/01/2013 B B NR 1,176,250 3,000,000 Owens-Brockway Glass Container, Senior Secured Note 8.750%, 11/15/2012 BB B NR 3,341,250 4,602,437 ELECTRIC UTILITIES -- 15.0% 3,375,000 AES Corp. (The), Senior Secured Note, 144A 8.750%, 5/15/2013 B B NR 3,771,562 2,000,000 AES Corp. (The), Senior Secured Note, 144A 9.000%, 5/15/2015 B B NR 2,260,000 625,000 Calpine Corp., Senior Secured Note, 144A 8.750%, 7/15/2013 B NR BB 609,375 5,200,000 Calpine Corp., Senior Secured Note, 144A 9.875%, 12/01/2011 BB NR NR 5,343,000 2,250,000 CMS Energy Corp., Senior Secured Note, 144A 7.750%, 8/01/2010 B B B 2,365,312 2,650,000 Edison Mission Energy Corp., Senior Note 7.730%, 6/15/2009 B B NR 2,524,125 3,150,000 Illinois Power Co., Note 11.500%, 12/15/2010 B B B 3,780,000 3,300,000 Reliant Resources, Inc., Senior Secured Note, 144A 9.500%, 7/15/2013 B B B 3,531,000
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- ELECTRIC UTILITIES - CONTINUED $4,000,000 TECO Energy, Inc., Note 7.500%, 6/15/2010 BB Ba BB $ 4,280,000 28,464,374 ELECTRONICS -- 2.1% 800,000 Amkor Technology, Inc., Senior Note 9.250%, 2/15/2008 B B NR 908,000 2,750,000 Xerox Corp., Note 7.625%, 6/15/2013 B B BB 2,970,000 3,878,000 ENTERTAINMENT & LEISURE -- 15.7% 1,275,000 Bally Total Fitness Holding Corp., Note, 144A 10.500%, 7/15/2011 B B B 1,281,375 400,000 Bally Total Fitness Holding Corp., Senior Subordinated Note, Series C 9.875%, 10/15/2007 B B B 364,000 2,100,000 Choctaw Resort Development Enterprise Corp., Senior Note 9.250%, 4/01/2009 BB B NR 2,278,500 3,175,000 Chukchansi Economic Development Authority, Senior Note, 144A 14.500%, 6/15/2009 NR NR NR 3,857,625 2,000,000 Chumash Casino & Resort Enterprise, Senior Note, 144A 9.000%, 7/15/2010 BB Ba NR 2,210,000 375,000 Hollywood Entertainment Corp., Senior Subordinated Note 9.625%, 3/15/2011 B B NR 403,125 500,000 Horseshoe Gaming LLC, Senior Subordinated Note 8.625%, 5/15/2009 B B NR 528,125 4,125,000 Mohegan Tribal Gaming Authority, Senior Subordinated Note 8.000%, 4/01/2012 BB Ba NR 4,465,312 2,000,000 Mohegan Tribal Gaming Authority, Senior Subordinated Note 8.375%, 7/01/2011 BB Ba NR 2,180,000 1,175,000 Premier Parks, Inc., Senior Note 9.750%, 6/15/2007 B B NR 1,232,281 2,350,000 River Rock Entertainment Authority, Senior Note, 144A 9.750%, 11/01/2011 B B NR 2,526,250 1,725,000 Six Flags, Inc., Senior Note 8.875%, 2/01/2010 B B NR 1,770,281 875,000 Six Flags, Inc., Senior Note 9.750%, 4/15/2013 B B NR 920,938
See accompanying notes to financial statements. 7 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND SCHEDULE OF INVESTMENTS CONTINUED DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- ENTERTAINMENT & LEISURE - CONTINUED $1,785,000 Turning Stone Casino Resort Enterprise, Senior Note, 144A 9.125%, 12/15/2010 B B NR $ 1,941,188 3,250,000 Wynn Las Vegas Capital Corp., Note 12.000%, 11/01/2010 CCC B NR 3,826,875 29,785,875 FOREST PRODUCTS & PAPER -- 9.6% 550,000 Boise Cascade Corp., Senior Note 6.500%, 11/01/2010 BB Ba BB 573,737 300,000 Boise Cascade Corp., Senior Note 7.000%, 11/01/2013 BB Ba BB 311,863 2,000,000 Georgia-Pacific Corp., Senior Note 8.875%, 2/01/2010 BB Ba BB 2,280,000 2,000,000 Graphic Packaging International Corp., Senior Note, 144A 8.500%, 8/15/2011 B B NR 2,190,000 2,200,000 Louisiana-Pacific Corp., Senior Note 8.875%, 8/15/2010 BB Ba BB 2,596,000 4,000,000 Louisiana-Pacific Corp., Senior Subordinated Note 10.875%, 11/15/2008 BB Ba BB 4,760,000 2,800,000 Pacifica Papers, Inc., Senior Note 10.000%, 3/15/2009 BB Ba NR 2,968,000 2,575,000 Playtex Products, Inc., Senior Subordinated Note 9.375%, 6/01/2011 CCC Caa NR 2,600,750 18,280,350 HEALTH CARE PROVIDERS -- 7.5% 2,700,000 Express Scripts, Inc., Senior Note 9.625%, 6/15/2009 BBB Ba NR 2,902,500 2,975,000 Monitronics International, Inc., Senior Subordinated Note, 144A 11.750%, 9/01/2010 B B NR 3,086,563 3,750,000 Tenet Healthcare Corp., Note 7.375%, 2/01/2013 BB B BB 3,768,750 1,000,000 Tenet Healthcare Corp., Senior Note 6.375%, 12/01/2011 BB B BB 960,000 125,000 Tenet Healthcare Corp., Senior Note 6.500%, 6/01/2012 BB B BB 119,844 3,075,000 US Oncology, Inc., Senior Subordinated Note 9.625%, 2/01/2012 B B NR 3,374,813 14,212,470
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- HOME CONSTRUCTION, FURNISHINGS & APPLIANCES -- 3.1% $1,000,000 Beazer Homes USA, Inc., Senior Note 8.375%, 4/15/2012 BB Ba NR $ 1,102,500 1,000,000 Beazer Homes USA, Inc., Senior Note 8.625%, 5/15/2011 BB Ba NR 1,100,000 1,400,000 Salton, Inc., Senior Subordinated Note 10.750%, 12/15/2005 B B NR 1,428,000 2,000,000 Standard Pacific Corp., Senior Note 9.500%, 9/15/2010 BB Ba NR 2,230,000 5,860,500 MEDIA - BROADCASTING & PUBLISHING -- 19.9% 2,725,000 Charter Communications Holdings II LLC/Charter Communications Holdings II Capital Corp., Senior Note, 144A 10.250%, 9/15/2010 CCC Caa NR 2,861,250 7,000,000 Charter Communications Holdings, Inc., Senior Note 10.000%, 5/15/2011 CCC Ca NR 6,090,000 150,000 Dex Media East LLC/Dex Media East Finance Co., Guaranteed Note 12.125%, 11/15/2012 B B B 184,500 2,025,000 Dex Media, Inc., Note, 144A 8.000%, 11/15/2013 B Caa NR 2,126,250 1,625,000 Dex Media, Inc., Note, 144A 0.000%/9.000%, 11/15/2013 (c) B B B 1,145,625 2,000,000 Insight Midwest, LP/Insight Capital, Inc., Senior Note 9.750%, 10/01/2009 B B NR 2,115,000 600,000 Mediacom LLC/Mediacom Capital Corp., Senior Note 9.500%, 1/15/2013 B B NR 636,000 2,825,000 Ono Finance PLC, Note 13.000%, 5/01/2009 CCC Caa B 2,941,531 3,500,000 Ono Finance PLC, Note 14.000%, 2/15/2011 CCC Caa B 3,679,375 3,000,000 Paxson Communications Corp., Senior Subordinated Note 10.750%, 7/15/2008 CCC Caa NR 3,273,750 5,750,000 Paxson Communications Corp., Senior Subordinated Note 0.000%/12.250%, 1/15/2009 (c) CCC Caa NR 5,045,625 2,000,000 Primedia, Inc., Senior Note 8.875%, 5/15/2011 B B NR 2,110,000 1,350,000 Rogers Cable, Inc., Senior Secured Note 7.875%, 5/01/2012 BBB Ba NR 1,505,250
See accompanying notes to financial statements. 9 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND SCHEDULE OF INVESTMENTS CONTINUED DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- MEDIA - BROADCASTING & PUBLISHING - CONTINUED $ 675,000 Spanish Broadcasting System, Inc., Senior Subordinated Note 9.625%, 11/01/2009 CCC Caa NR $ 720,563 3,400,000 Telenet Group Holding NV, Senior Note, 144A 0.000%/11.500%, 6/15/2014 (c) CCC Caa NR 2,142,000 1,000,000 Vivendi Universal SA, Note, 144A 9.250%, 4/15/2010 BB B NR 1,185,000 37,761,719 METALS -- 5.9% 3,200,000 AK Steel Corp., Guaranteed Senior Note 7.750%, 6/15/2012 B B NR 2,736,000 2,000,000 IPSCO, Inc., Senior Note 8.750%, 6/01/2013 BB Ba NR 2,210,000 2,875,000 Oregon Steel Mills, Inc., Note 10.000%, 7/15/2009 B B NR 2,522,813 3,500,000 Shaw Group, Inc., Senior Note, 144A 10.750%, 3/15/2010 BB Ba NR 3,710,000 11,178,813 MULTIPLE UTILITIES -- 4.5% 4,000,000 Coastal Corp., Note 7.750%, 6/15/2010 B Caa NR 3,775,000 1,250,000 Coastal Corp., Senior Note 9.625%, 5/15/2012 B Caa NR 1,237,500 3,500,000 El Paso Natural Gas Co., Senior Note 7.625%, 8/01/2010 B B NR 3,596,250 8,608,750 OIL & GAS -- 5.7% 1,125,000 Lyondell Chemical Co., Senior Secured Note 10.500%, 6/01/2013 BB B BB 1,226,250 500,000 Newfield Exploration Co., Senior Note 7.625%, 3/01/2011 BB Ba NR 557,500 2,650,000 Newfield Exploration Co., Senior Subordinated Note 8.375%, 8/15/2012 BB Ba NR 2,968,000 2,300,000 Plains All American Pipeline LP/Plains All American Finance Corp., Senior Note 7.750%, 10/15/2012 BBB Ba NR 2,653,625 850,000 Plains Exploration & Production Co., LP, Senior Subordinated Note 8.750%, 7/01/2012 B B NR 933,938
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- OIL & GAS - CONTINUED $2,250,000 Vintage Petroleum, Inc., Senior Note 8.250%, 5/01/2012 BB Ba NR $ 2,446,875 10,786,188 PHARMACEUTICALS -- 2.3% 4,225,000 Biovail Corp., Senior Subordinated Note 7.875%, 4/01/2010 BB B NR 4,309,500 RETAILERS -- 0.8% 625,000 J.C. Penney Co., Inc., Note 9.000%, 8/01/2012 BB Ba BB 747,656 700,000 Michaels Stores, Inc., Senior Note 9.250%, 7/01/2009 BB Ba NR 772,625 1,520,281 TELEPHONE SYSTEMS -- 16.1% 1,875,000 ACC Escrow Corp., Senior Note, 144A 10.000%, 8/01/2011 B B NR 2,090,625 2,500,000 Centennial Cellular Corp./Centennial Cellular Operating Co. LLC, Senior Subordinated Note 10.750%, 12/15/2008 CCC Caa B 2,637,500 2,750,000 Centennial Cellular Operating Co./Centennial Communications Corp., Guaranteed Senior Note 10.125%, 6/15/2013 CCC Caa NR 3,018,125 2,575,000 Cincinnati Bell, Inc., Senior Subordinated Note, 144A 8.375%, 1/15/2014 B B B 2,768,125 4,000,000 Dobson Communications Corp., Senior Note 10.875%, 7/01/2010 CCC B NR 4,360,000 2,600,000 Nextel Communications, Inc., Senior Note 9.375%, 11/15/2009 B B BB 2,834,000 750,000 Qwest Capital Funding, Inc., Note 7.900%, 8/15/2010 CCC Caa CCC 761,250 2,000,000 Qwest Services Corp., Senior Subordinated Note, 144A 13.500%, 12/15/2010 CCC NR NR 2,430,000 5,330,881 Receivables Structured Trust Corp., Note, 144A 7.440%, 12/10/2006 NR Caa CCC 5,317,554 1,750,000 Rural Cellular Corp., Senior Subordinated Note 9.750%, 1/15/2010 CCC Caa NR 1,710,625 2,613,000 Rural Cellular Corp., Subordinated Note 9.625%, 5/15/2008 CCC Caa NR 2,547,675 30,475,479
See accompanying notes to financial statements. 11 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND SCHEDULE OF INVESTMENTS CONTINUED DECEMBER 31, 2003
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a) CORPORATE DEBT - CONTINUED -------------------------------------------------------------------------------------------------------------------------------- TEXTILES, CLOTHING & FABRICS -- 1.4% $2,625,000 Broder Brothers Co., Senior Note, 144A 11.250%, 10/15/2010 B B NR $ 2,585,625 TRANSPORTATION -- 5.5% 5,550,000 Grupo Transportacion Ferroviaria Mexicana SA de CV, Senior Note 11.750%, 6/15/2009 B B B 5,702,625 700,000 Kansas City Southern Railway Co., Senior Note 9.500%, 10/01/2008 B Ba NR 777,000 2,250,000 Laidlaw International, Inc., Senior Note, 144A 10.750%, 6/15/2011 B B NR 2,542,500 1,350,000 Stena AB, Senior Note, 144A 7.500%, 11/01/2013 BB Ba NR 1,390,500 10,412,625 TOTAL CORPORATE DEBT (IDENTIFIED COST $246,434,907) 261,547,524 PREFERRED STOCKS -- 6.5% MEDIA - BROADCASTING & PUBLISHING -- 4.4% 58,500 Cablevision Systems Corp., Class H, 11.750%, 10/01/2007 B B NR 6,084,000 18,000 Primedia, Inc., Series D, 10.000%, 2/01/2008 NR Ca NR 1,764,000 6,250 Primedia, Inc., Series H, 8.625%, 4/01/2010 B Ca NR 568,750 8,416,750 TELEPHONE SYSTEMS -- 2.1% 36,500 Dobson Communications Corp., 13.000%, 5/01/2009 NR Caa NR 3,923,750 TOTAL PREFERRED STOCKS (IDENTIFIED COST $12,367,000) 12,340,500 TOTAL INVESTMENTS -- 144.4% (IDENTIFIED COST $258,801,907) (b) 273,888,024 Other Assets, Less Liabilities -- 3.1% 5,817,028 Money Market Cumulative Preferred Shares plus cumulative unpaid dividends (47.5%) (90,041,418) TOTAL NET ASSETS -- 100% $189,663,634
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND NOTES TO SCHEDULE OF INVESTMENTS -------------------------------------------------------------------------------- * Ratings have not been audited by Ernst & Young LLP. a See Note 2a of Notes to Financial Statements. b Federal Tax Information: At December 31, 2003, the net unrealized appreciation on investments based on cost of $258,507,389 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost $ 15,595,700 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (215,065) Net unrealized appreciation $ 15,380,635
c Denotes a step-up bond: a zero coupon bond that converts to a fixed rate of interest at a designated future date. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of 144A Securities amounted to $68,857,054 or 36.3% of net assets applicable to common shares. Quality Profile (unaudited) The quality ratings of securities in the Fund as of December 31, 2003 were as follows:
PERCENT OF TOTAL INVESTMENTS S&P RATING/MOODY'S RATING/FITCH RATING AND CASH** A/A/A 1.4% BBB/Baa/BBB 3.4 BB/Ba/BB 33.1 B/B/B 42.3 CCC/Caa/CCC 16.9 CC/Ca/CC 0.6 NR (Not Rated) 2.2 Cash 0.1 100.0%
** Percentages compiled using the highest rating for each security. See accompanying notes to financial statements. 13 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND STATEMENT OF ASSETS & LIABILITIES DECEMBER 31, 2003 ASSETS =========================================================================================================== Investments at cost $258,801,907 ----------------------------------------------------------------------------------------------------------- Net unrealized appreciation 15,086,117 ----------------------------------------------------------------------------------------------------------- Investments at value 273,888,024 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents 1,254,446 ----------------------------------------------------------------------------------------------------------- Dividends and interest receivable 5,178,079 ----------------------------------------------------------------------------------------------------------- Prepaid expenses 59,035 ----------------------------------------------------------------------------------------------------------- TOTAL ASSETS 280,379,584 LIABILITIES =========================================================================================================== Dividends payable to common shareholders 22,183 ----------------------------------------------------------------------------------------------------------- Management fees payable 141,960 ----------------------------------------------------------------------------------------------------------- Payable for offering costs on preferred shares 308,035 ----------------------------------------------------------------------------------------------------------- Other accrued expenses 202,354 ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 674,532 MONEY MARKET CUMULATIVE PREFERRED SHARES (3,600 SHARES ISSUED AND OUTSTANDING) AT LIQUIDATION VALUE PLUS CUMULATIVE UNPAID DIVIDENDS 90,041,418 ----------------------------------------------------------------------------------------------------------- NET ASSETS APPLICABLE TO COMMON SHARES $189,663,634 =========================================================================================================== NET ASSETS CONSIST OF: =========================================================================================================== Common Shares, no par value; unlimited number of shares authorized, 12,230,942 shares issued and outstanding $173,622,673 ----------------------------------------------------------------------------------------------------------- Accumulated net investment income 343,688 ----------------------------------------------------------------------------------------------------------- Accumulated net realized gain on investments 611,156 ----------------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 15,086,117 ----------------------------------------------------------------------------------------------------------- NET ASSETS APPLICABLE TO COMMON SHARES $189,663,634 COMPUTATION OF NET ASSET VALUE PER COMMON SHARE: =========================================================================================================== NET ASSETS $189,663,634 COMMON SHARES ISSUED AND OUTSTANDING 12,230,942 NET ASSET VALUE PER SHARE $ 15.51 MARKET VALUE (CLOSING PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE) $ 15.91
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 LEHMAN BROTHER FIRST TRUST INCOME OPPORTUNITY FUND STATEMENT OF OPERATIONS FOR THE PERIOD JULY 28, 2003 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2003 INVESTMENT INCOME =========================================================================================================== Interest $ 8,305,055 ----------------------------------------------------------------------------------------------------------- Dividends 457,063 ----------------------------------------------------------------------------------------------------------- 8,762,118 Expenses Management fees 609,721 ----------------------------------------------------------------------------------------------------------- Investor service fees 50,810 ----------------------------------------------------------------------------------------------------------- Trustees' fees and expenses 61,989 ----------------------------------------------------------------------------------------------------------- Custodian 110,182 ----------------------------------------------------------------------------------------------------------- Audit and tax services 46,920 ----------------------------------------------------------------------------------------------------------- Legal 50,050 ----------------------------------------------------------------------------------------------------------- Reports to shareholders 46,046 ----------------------------------------------------------------------------------------------------------- Preferred shares auction 45,125 ----------------------------------------------------------------------------------------------------------- Interest expense 145,400 ----------------------------------------------------------------------------------------------------------- Miscellaneous 52,969 ----------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 1,219,212 NET INVESTMENT INCOME 7,542,906 REALIZED AND UNREALIZED GAIN ON INVESTMENTS =========================================================================================================== Realized gain on: Investments -- net 1,163,262 ----------------------------------------------------------------------------------------------------------- Change in unrealized appreciation of: Investments -- net 15,086,117 ----------------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 16,249,379 ----------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 23,792,285 =========================================================================================================== LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM NET INVESTMENT INCOME (202,338) =========================================================================================================== NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE TO COMMON SHARES $23,589,947 ===========================================================================================================
See accompanying notes to financial statements. 15 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 28, 2003* TO DECEMBER 31, 2003 FROM OPERATIONS: =========================================================================================================== Net investment income $ 7,542,906 ----------------------------------------------------------------------------------------------------------- Net realized gain on investments 1,163,262 ----------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation of investments 15,086,117 ----------------------------------------------------------------------------------------------------------- Dividends to preferred shareholders from net investment income (202,338) ----------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 23,589,947 LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS: =========================================================================================================== Net investment income (7,356,716) ----------------------------------------------------------------------------------------------------------- Net realized gain (192,270) ----------------------------------------------------------------------------------------------------------- (7,548,986) INCREASE IN NET ASSETS DERIVED FROM COMMON SHARE TRANSACTIONS: 174,859,218 =========================================================================================================== Offering costs and underwriting commissions on preferred shares (1,236,545) ----------------------------------------------------------------------------------------------------------- TOTAL INCREASE IN NET ASSETS 189,663,634 NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS =========================================================================================================== Beginning of period 0 ----------------------------------------------------------------------------------------------------------- End of period $189,663,634 ----------------------------------------------------------------------------------------------------------- ACCUMULATED NET INVESTMENT INCOME $ 343,688
* Commencement of operations. See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND FINANCIAL HIGHLIGHTS
FOR THE PERIOD JULY 28, 2003* THROUGH DECEMBER 31, 2003 NET ASSET VALUE, BEGINNING OF PERIOD (COMMON SHARES) (a) $ 14.33 ----------------------------------------------------------------------------------------------------------- Net Investment Income (b) 0.64 ----------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain on Investments 1.31 ----------------------------------------------------------------------------------------------------------- Dividends to Preferred Shareholders From Net Investment Income (0.02) ----------------------------------------------------------------------------------------------------------- TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 1.93 Less Distributions to Common Shareholders: ----------------------------------------------------------------------------------------------------------- From Net Investment Income (0.60) ----------------------------------------------------------------------------------------------------------- From Net Realized Gains (0.02) ----------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (0.62) Common Shares Offering Costs Charged to Paid-In Capital (0.03) ----------------------------------------------------------------------------------------------------------- Preferred Shares Underwriting Commissions and Offering Costs Charged to Paid-In Capital (0.10) ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD (COMMON SHARES) $ 15.51 =========================================================================================================== MARKET VALUE, END OF PERIOD (COMMON SHARES) $ 15.91 =========================================================================================================== Total Return on Net Asset Value (%) (c) 12.73 ----------------------------------------------------------------------------------------------------------- Total Return on Market Value (%) (c) 10.47 ----------------------------------------------------------------------------------------------------------- Ratio of Expenses (excluding interest expense) to Average Net Assets Applicable to Common Shares (%) (d) (e) 1.42 ----------------------------------------------------------------------------------------------------------- Ratio of Interest Expense to Average Net Assets Applicable to Common Shares (%) (d) (e) 0.19 ----------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets Applicable to Common Shares (%) (d) (e) 10.00 ----------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate (%) 32.08 ----------------------------------------------------------------------------------------------------------- Net Assets Applicable to Common Shares, End of Period (000) $189,664 ----------------------------------------------------------------------------------------------------------- MONEY MARKET CUMULATIVE PREFERRED SHARES =========================================================================================================== Preferred Shares Outstanding, End of Period (000) $ 90,000 ----------------------------------------------------------------------------------------------------------- Asset Coverage Per $1,000 $ 3,107 ----------------------------------------------------------------------------------------------------------- Involuntary Liquidation Preference Per Share (f) $ 25,000 ----------------------------------------------------------------------------------------------------------- Approximate Market Value Per Share $ 25,000 -----------------------------------------------------------------------------------------------------------
* Commencement of operations. (a) Net asset value at beginning of period reflects the deduction from the $15.00 offering price of the sales load of $0.675 per share paid by the shareholder. (b) Calculated using average common shares outstanding during the period. (c) Total return on net assets value is calculated assuming a purchase at the offering price of $15.00 less the sales load of $0.675 paid by the shareholder on the first day and the ending net asset value per share. Total return on market value is calculated assuming a purchase at the offering price of $15.00 on the first day and a sale at the current market price on the day of the period. Total return on net asset value and total return on on market value are not reflected on a annualized basis. (d) Annualized. (e) Ratios do not reflect the effect of dividend payments to preferred shareholders. Ratios to average net assets applicable to common shares reflect the Fund's leveraged capital structure. (f) Plus accumulated and unpaid dividends. See accompanying notes to financial statements. 17 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 1 -- ORGANIZATION Lehman Brothers First Trust Income Opportunity Fund (the "Fund") was organized as a statutory trust under the laws of the state of Delaware on April 8, 2003, and is registered under the Investment Company act of 1940, as amended (the "1940 Act"), as a diversified, closed-end management investment company. Lehman Brothers Asset Management Inc. (the "Adviser") is investment adviser to the Fund. Lincoln Capital Fixed Income Management Company, LLC (a wholly owned subsidiary of Lehman Brothers Holdings Inc.) is the subadviser to the Fund. The Fund's common shares are listed on the New York Stock Exchange under the symbol LBC. The Fund's investment objective is to seek high total return (income plus capital appreciation). The Fund will pursue its investment objective by investing its assets primarily in high yield debt securities. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. a) VALUATION: Debt securities are valued using an independent pricing service approved by the Board of Trustees, which utilizes closing market prices, market quotations and transactions, quotations from dealers and various relationships among securities in determining value. Securities for which closing market prices or market quotations are not available or are not considered by the Adviser to be reflective of a security's market value, are valued at their fair value as determined in good faith under consistently applied procedures established by and under the supervision of the Board of Trustees. Securities with remaining maturities of 60 days or less are valued at amortized cost. This method involves valuing a portfolio security initially at its cost and thereafter assumes a constant amortization to maturity of any discount or premium. b) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income, including amortization of premium and accretion of discount on securities, is recorded on the accrual basis. Realized gains and losses on investments are recorded on the basis of identified cost. c) ORGANIZATION AND OFFERING COSTS: The Adviser has agreed to pay all organizational expenses and the amount by which the Fund's offering costs for common stock (other than sales load) exceeded $0.03 per share. Offering costs for common stock paid for the Fund were charged as a reduction of common stock paid-in-capital at the completion of the Fund's offering and amounted to $366,000. Additionally, offering costs of approximately $337,000 incurred with respect to the issuance of Preferred Shares and paid by the Fund were charged as a reduction of common stock paid-in-capital at the completion of the Fund's preferred shares offering. d) FEDERAL INCOME TAXES: It is the policy of the Fund to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required. e) REVERSE REPURCHASE AGREEMENTS: The Fund is permitted to enter into reverse repurchase agreements with banks or securities firms deemed creditworthy by the Adviser. A reverse repurchase agreement involves the sale of a security by the Fund, with an agreement to repurchase the same or substantially similar security at an agreed upon price and date. Securities purchased subject to repurchase agreements must have an aggregate market value greater than or equal to the repurchase price plus accrued interest at all times. Reverse repurchase agreements involve the risk that the market value of the securities purchased with the proceeds from the sale of securities received by the Fund may decline below the price of the securities that the Fund is obligated to repurchase. There were no reverse repurchase agreements outstanding at December 31, 2003. NOTE 3 -- FEES AND TRANSACTIONS WITH RELATED PARTIES The Fund pays all expenses incurred in connection with the operations of the Fund. These expenses, among others, include custodian and fund accounting fees, legal and audit fees, fees and LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 expenses of the disinterested Trustees, registration fees, and printing expenses. The Fund pays the Adviser a monthly fee computed at an annual rate of 0.60% of the Fund's average daily Managed Assets (net assets, including assets attributable to any outstanding preferred shares, plus the aggregate principal amount of any borrowings). The Adviser is responsible for developing, implementing and supervising the Fund's investment program and providing certain administrative services to the Fund. The Adviser has retained Lincoln Capital Fixed Income Management Company, LLC ("Lincoln Capital"), to serve as the sub-adviser of the Fund and to manage the Fund's investment portfolio. The Adviser compensates Lincoln Capital for its services as sub-adviser. The Adviser pays Lincoln Capital a monthly sub-advisery fee calculated at the following annual percentage rates of the Fund's average daily Managed Assets: 0.55% on the Fund's first $25 million of Managed Assets, 0.45% on the next $25 million of Managed Assets, 0.35% on the next $50 million of Managed Assets, and 0.30% on Managed Assets that are in excess of $100 million. The Adviser and Lincoln Capital are wholly owned subsidiaries of Lehman Brothers Holdings Inc., a publicly traded corporation. First Trust Portfolio L.P. ("First Trust") serves as the Fund's distribution and marketing agent, and investor servicing agent. As the Fund's distribution and marketing agent, First Trust provides certain distribution and marketing services for the Fund's common shares including preparing marketing materials and presentations, developing contacts with brokers whose clients may have an interest in acquiring Fund shares and replying to information requests from prospective investors. In consideration for these services, First Trust receives a fee paid by the Adviser. First Trust, as the investor servicing agent, developed and maintains a website for the Fund, assists in the review of shareholder material, assists in the dissemination of the Fund's net asset value and market price, provides ongoing shareholder and account maintenance services, replies to information requests from shareholders and aids in secondary market support. In consideration for these services, the Fund pays First Trust a monthly fee computed at the annual rate 0.05% of the Fund's average daily Managed Assets. For the period ended December 31, 2003, the Fund paid First Trust, as the investor servicing agent, a fee equal to $50,810. During the period July 28, 2003 (commencement of operations) through December 31, 2003, Lehman Brothers Inc., an affiliate of the Adviser, received underwriting commissions equal to $900,000 in connection with the offering of the Fund's preferred stock. The Fund pays no compensation to its officers or to its Trustees who are interested Trustees of the Adviser or its affiliates. NOTE 4 -- INVESTMENT IN SECURITIES For the period July 28, 2003 (commencement of operations) through December 31, 2003, purchases and sales of investments, other than short-term securities, aggregated $327,412,850 and $69,277,642, respectively. NOTE 5 -- MONEY MARKET CUMULATIVE PREFERRED SHARES The Fund is authorized to issue 3,750 Money Market Cumulative Preferred Shares ("MMP"), each without par value. On October 22, 2003, the Fund issued 3,600 MMP with proceeds of $90,000,000 in a public offering. The underwriting commissions and offering costs of $1,236,545 were incurred in connection with the offering and were charged directly to paid-in capital of the common shares. Dividends on the MMP are cumulative at a rate which was established at the offering and have been reset every twenty-eight days thereafter by an auction. The Fund pays commissions to certain broker-dealers at the end of each auction at an annual rate of 0.25%. For the period October 22, 2003 (date of issuance of MMP) through December 31, 2003, Lehman Government Securities, Inc., an affiliate of the Adviser, earned $43,767 in commissions. The MMP are redeemable at the option of the Fund at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends, on any dividend payment date. The MMP are also subject to mandatory redemption at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends, if the Fund defaults on its asset maintenance requirements with respect to the MMP and fails to cure such a default within the time permitted. If the dividends on the MMP shall remain unpaid in an amount equal to two full years' dividends, the holders of the MMP, as a class, have the right to elect a majority of the Board of Trustees. In general, the holders of the MMP and the common shares have equal voting rights of one vote per share, except that the holders of the MMP, as a 19 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND NOTES TO FINANCIAL STATEMENTS CONTINUED separate class, have the right to elect at least two members of the Board of Trustees and to vote under certain other circumstances specified in the Fund's Amended By-Laws. The MMP have a liquidation preference of $25,000 per share, plus accumulated and unpaid dividends. The Fund is required to maintain certain asset coverage with respect to the MMP as defined in the Fund's Amended By-Laws and the Investment Company Act of 1940. NOTE 6 -- DISTRIBUTIONS TO SHAREHOLDERS The Fund intends to make monthly distributions of net investment income to common shareholders, after payments of any dividends on outstanding MMP. Distributions to common shareholders are recorded on the ex-dividend date. Distributions to preferred shareholders are recorded daily and are payable at the end of each dividend period. Each dividend payment period for the MMP is generally twenty-eight days. For the period ended December 31, 2003, the dividend rates for MMP ranged from 1.14% to 1.20%. The dividend rate for MMP on December 31, 2003 was 1.20%. In addition, at least annually, the Fund intends to distribute net capital gains, if any. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. NOTE 7 -- SHARES OF BENEFICIAL INTEREST The Fund's Declaration of Trust authorizes the Trustees to issue an unlimited number of common shares for the Fund, each without par value. Transactions in common shares were as follows:
FOR THE PERIOD JULY 28, 2003 (a) TO DECEMBER 31, 2003 ------------------------- SHARES AMOUNT ------------------------- Shares purchased by investment advisor 6,667 $ 100,005 Initial Public Offering on July 28, 2003 (b) 11,000,000 157,245,000 Purchase of additional shares by underwriters on August 22, 2003 and September 16, 2003 (c) 1,200,000 $ 17,154,000 Shares issued pursuant to the Fund's dividend reinvestment plan 24,275 360,213 ---------- ------------- Increase derived from capital shares transactions 12,230,942 $ 74,859,218 ========== =============
(a) Commencement of operations. (b) After deduction of underwriting commissions and offering costs of $7,755,000. (c) After deduction of underwriting commissions and offering costs of $846,000. NOTE 8 -- CONCENTRATION OF CREDIT RISK The Fund will normally invest at least 80% of its Managed Assets in investments offering high current income, which generally will be in the lower rating categories of recognized rating agencies. These investments are regarded as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligations and will generally involve more credit risk than securities in the higher rating categories. In addition, the trading market for high yield investments may be relatively less liquid than the market for higher-rated investments. NOTE 9 -- FEDERAL INCOME TAX INFORMATION For the period ended December 31, 2003, the tax character of distributions paid was $7,751,324 of ordinary income. As of December 31, 2003, the components of accumulated earnings on a tax basis were as follows: Undistributed ordinary income $ 660,326 ---------------------------------------------------------- Unrealized gains 15,380,635* ---------------------------------------------------------- TOTAL ACCUMULATED GAINS $ 16,040,961
* The difference between book-basis and tax-basis net unrealized gains is attributed primarily to wash sales and return of capital. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees Lehman Brothers First Trust Income Opportunity Fund We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Lehman Brothers First Trust Income Opportunity Fund (the "Fund") as of December 31, 2003, and the related statements of operations and of changes in net assets and the financial highlights for the period July 28, 2003 (commencement of operations) through December 31, 2003. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund at December 31, 2003, the results of its operations, changes in its net assets and the financial highlights for the period July 28, 2003 (commencement of operations) through December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Ernst & Young LLP New York, New York February 10, 2004 21 DIVIDEND REINVESTMENT PLAN (UNAUDITED) The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to as an "opt-out" plan. Each common shareholder will have all distributions of dividends and capital gains automatically reinvested in additional common shares by Investors Bank & Trust Company, as agent for shareholders pursuant to the Plan (the "Plan Agent"), unless the shareholder elects to receive cash or unless the shares are registered in the name of a broker-dealer or other nominee (that is, in "street name") and the respective nominee does not participate in the Plan. For Plan participants the Plan Agent will either (i) effect purchases of common shares under the Plan in the open market or (ii) distribute newly issued common shares of the Fund. Shareholders who elect not to participate in the Plan will receive all distributions in cash paid by check mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, as dividend disbursing agent. Certain broker-dealers and nominees do not permit their clients to participate in dividend reinvestment plans. Shareholders whose common shares are held in the name of a broker or nominee should contact the broker or nominee to determine whether and how they may participate in the Plan. The Plan Agent serves as agent for the shareholders in administering the Plan. After the Fund declares a dividend or makes a capital gain distribution, the Plan Agent will, as agent for the participants, either (i) receive the cash payment and use it to buy common shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute newly issued common shares of the Fund on behalf of the participants. The Plan Agent will receive cash from the Fund with which to buy common shares in the open market if, on the determination date, the net asset value per share exceeds the market price per share plus estimated brokerage commissions on that date. The Plan Agent will receive the dividend or distribution in newly issued common shares of the Fund if, on the determination date, the market price per share plus estimated brokerage commissions equals or exceeds the net asset value per share of the Fund on that date. The number of shares to be issued will be computed at a per share rate equal to the greater of (i) the net asset value or (ii) 95% of the closing market price per share on the payment date. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent. Such withdrawal will be effective immediately if received not less than ten days prior to a distribution record date; otherwise, it will be effective for all subsequent dividend record dates. When a participant withdraws from the Plan or upon termination of the Plan as provided below, certificates for whole common shares credited to his or her account under the Plan will be issued and a cash payment will be made for any fraction of a common share credited to such account. In the alternative, upon receipt of the participant's instructions, common shares will be sold and the proceeds sent to the participant less brokerage commissions and any applicable taxes. The Plan Agent maintains each shareholder's account in the Plan and furnishes confirmations of all acquisitions made for the participant. Common shares in the account of each Plan participant will be held by the Plan Agent on behalf of the participant. Proxy material relating to shareholders' meetings of the Fund will include those shares purchased as well as shares held pursuant to the Plan. In the case of shareholders, such as banks, brokers or nominees, which hold common shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of common shares certified from time to time by the record shareholders as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners who are participants in the Plan. The Plan Agent's fees for the handling of reinvestment of dividends and other distributions will be paid by the Fund. Each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of distributions. There are no other charges to participants for reinvesting dividends or capital gain distributions; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. The automatic reinvestment of dividends and other distributions will not relieve participants of any income tax that may be payable or required to be withheld on such dividends or distributions. The Fund and the Plan Agent reserve the right to amend or terminate the Plan. All correspondence concerning the Plan should be directed to: Investors Bank & Trust Company, 200 Clarendon Street, Mail Stop OPS22, Boston, MA 02116 (Telephone) 617-937-6226. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 TRUSTEE AND OFFICER TABLE (UNAUDITED) Set forth below is information about the Trustees. The address for each Trustee is Lehman Brothers Asset Management Inc., 399 Park Avenue, New York, NY 10022. INDEPENDENT TRUSTEES:
------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS OVERSEEN IN OTHER LEHMAN TRUSTEESHIPS TERM OF BROTHERS HELD OUTSIDE OF OFFICE AND ASSET LEHMAN LENGTH OF MANAGEMENT BROTHERS ASSET NAME AND POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT DATE OF BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX ------------------------------------------------------------------------------------------------------------------------ General James E. Dalton, Trustee 3 Year Term Board of Directors, Chair of the 1 None USAF (Retired) and Trustee Audit Committee at William Lyon 10/17/1930 since 2003 Homes, a home building business (since 1991); Director of Defense Group Inc., a defense business (since 1999); Director of Finance America, a mortgage business (since 2002); formerly, Vice President of Logicon Inc., a wholly-owned subsidiary of Northrop Grumman (1985-1998); General Manager of Logicon's Defense Technology Group (1995-1998). ------------------------------------------------------------------------------------------------------------------------ Margaret M.(Peggy) Eisen Trustee 1 Year Term Board of Directors, Chair of 1 Board of Trustees 6/19/1953 and Trustee Compensation Committee, and Member for Liberty Acorn since 2003 of the Audit Committee of Family of Mutual Antigenics Corporation, a Funds of Wanger biopharmaceutical company (since Asset Management 2003); Managing Director and Chief (since 2002). Investment Officer of Harbor Hills Capital, an investment banking and asset management firm focused on entrepreneurs and ultra-high net worth individuals (since 2003); Managing Director of DeGuardiola Advisors, an investment bank specializing in mergers and acquisitions of investment management firms (2001-2002); Managing Director of North American Equities of General Motors Investment Management Corporation (1995-2001). ------------------------------------------------------------------------------------------------------------------------ Michael M. Knetter Trustee 2 Year Term Dean of the University of 1 None 4/8/1960 and Trustee Wisconsin-Madison School of since 2003 Business (since 2002); prior thereto, Professor of International Economics and Associate Dean at the Amos Tuck School of Business -- Dartmouth College (1997-2002). ------------------------------------------------------------------------------------------------------------------------
23 TRUSTEE AND OFFICER TABLE (UNAUDITED) CONTINUED INDEPENDENT TRUSTEES:
------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS OVERSEEN IN OTHER LEHMAN TRUSTEESHIPS TERM OF BROTHERS HELD OUTSIDE OF OFFICE AND ASSET LEHMAN LENGTH OF MANAGEMENT BROTHERS ASSET NAME AND POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT DATE OF BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX ------------------------------------------------------------------------------------------------------------------------ Eugene A. Matthews Trustee 1 Year Term President of Nintai Capital, Inc., 1 None 11/9/1958 and Trustee an investment advisory firm that is since 2003 primarily focused on Japan's private equity market and general Asian investments (since 1997); Senior Fellow of Asia Studies for the Council of Foreign Relations (2001-2003); formerly, Partner of Apax-Globis Japan, Inc., a private equity investment firm specializing in venture capital and buyout investments in Japan (1998-2000). ------------------------------------------------------------------------------------------------------------------------ George W. Morriss Trustee 3 Year Term Executive Vice President and Chief 1 None 9/24/1947 and Trustee Financial Officer of People's Bank, since 2003 a diversified financial services company providing commercial, consumer, insurance and investment services (1991-2001). ------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES: ------------------------------------------------------------------------------------------------------------------------ Stephanie E. Dolan Trustee and 2 Year Term Senior Vice President of Lehman 1 None 4/4/1963 Assistant and Trustee Brothers Inc.; Controller of Lehman Treasurer since 2003 Brothers Asset Management. ------------------------------------------------------------------------------------------------------------------------ Scott Hall Trustee 2 Year Term Managing Director of First Trust 1 None 1/12/1957 and Trustee Advisors L.P. and First Trust since 2003 Portfolios L.P. (since 1992) ------------------------------------------------------------------------------------------------------------------------ Kurt A. Locher Chairman 3 Year Term Managing Director of Lehman 1 None 5/9/1966 and Trustee and Trustee Brothers Inc. (since 1998); since 2003 Managing Director of Lehman Brothers Asset Management (since 2003); Vice President of Lincoln Capital (since 2003); Director of BNC Mortgage Inc. (since 2000), Finance America LLC (since 1999), and TrueLink Inc. (since 1999); prior thereto President of Lehman Brothers Bank, F.S.B. (1999); and Senior Vice President of Lehman Brothers Inc. (1995-1998). ------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003 Set forth below is information about the officers of the Fund. Each officer serves for a one-year term. The address for each officer is Lehman Brothers Asset Management Inc., 399 Park Avenue, New York, NY 10022.
------------------------------------------------------------------------------------------------------------------------ NAME AND POSITION DATE OF BIRTH WITH FUND PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------ Bradley Tank President Chief Executive Officer of Lehman Brothers Asset Management; Managing Director 9/29/1957 and Global Head of Fixed Income Asset Management for Lehman Brothers (since 2002); Director of Fixed Income for Strong Capital Management in Menomonee Falls, Wisconsin (1990-2002); formerly a member of the Office of the CEO and Institutional and Intermediary Distribution; Named "Runner Up" for Morningstar Mutual Fund Manager of the year (1997); Vice President at Salomon Brothers in the Government, Mortgage and Financial Institutions businesses (1982-1990). ------------------------------------------------------------------------------------------------------------------------ Edward Grieb Treasurer Chief Financial Officer of Lehman Brothers Asset Management; Managing Director 9/22/1961 and Assistant Controller for Lehman Brothers; prior thereto, Audit Manager with Arthur Andersen serving clients in financial services, advertising and consumer products industries (1984-1991). ------------------------------------------------------------------------------------------------------------------------ Jonathan Morris Secretary Senior Vice President of Lehman Brothers Asset Management; Senior Vice President 3/1/1956 and General Counsel for Lehman Brother's Wealth and Asset Management business, including Lehman Brothers Private Client Services Division and asset management and investment advisory business (since 1997); prior thereto, Associate General Counsel of Travelers Group and its predecessor companies (1998-1996); formerly, Senior Vice President for Shearson Lehman Brothers (1993-1997) and First Vice President for Shearson Lehman Brothers (1988-1991); prior thereto litigation counsel for Seward & Kissel. Admitted to New York and Connecticut bars. ------------------------------------------------------------------------------------------------------------------------
The Fund's Statement of Additional Information includes additional information about the Trustees of the Fund and is available without charge, upon request, by calling 1-800-988-5196 or visting the Fund's website at www.lbftincomeopportunity.com. A description of the Fund's proxy voting policies and procedures is available (1) on the Fund's website at www.lbftincomeopportunity.com and (2) on the Commission's website at www.sec.gov. 25 [LEHMAN BROTHERS LOGO] (C)2004 LEHMAN BROTHERS INC.ALL RIGHTS RESERVED. LB10183 ITEM 2. CODE OF ETHICS. At a Board meeting held on November 18, 2003, the Registrant adopted a code of ethics that applies to the Registrant's President/Chief Executive Officer and Treasurer/Chief Financial Officer. For the year ended December 31, 2003, there were no amendments to a provision of the code of ethics, nor were there any waivers granted from a provision of the code of ethics. A copy of the Registrant's code of ethics is filed with this Form N-CSR under Item 10(a). ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. At a Board meeting held on June 26, 2003, the Registrant's Board of Trustees designated George Morriss as the Registrant's Audit Committee Financial Expert. George Morriss is deemed "independent" for purposes of this item because (i) he does not accept directly or indirectly any consulting, advisory, or compensatory fee from the issuer (other than in his capacity as a committee member or a member of the board of trustees); and (ii) he is not an "interested person" of the Registrant as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act"). ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) AUDIT FEES: The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the audit of the Registrant's annual financial statements and for the initial seed audit for 2003 were $35,000 and $8,400, respectively. (b) AUDIT RELATED FEES: The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the review of related filing of Form N-2 for 2003 was $16,800. (c) TAX FEES: The aggregate fees accrued for professional services rendered by Ernst & Young LLP for tax compliance, tax advice, and tax planning for 2003 was $4,000. Such services included the preparation of the year-end tax provision and excise tax work. (d) ALL OTHER FEES: The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the initial and year end agreed upon procedures reporting for the preferred shares for 2003 was $10,000. (e) (1) At a Board meeting held on June 26, 2003, the Registrant's Audit Committee pre-approved the provision of audit and non-audit services by Ernst & Young LLP for the fiscal year ending December 31, 2003. The Registrant has not delegated the pre-approval of audit and non-audit services to a member of the audit committee. Rather, any action of the audit committee with respect to the pre-approval process requires the vote of a majority of the audit committee members present, whether in person or otherwise, at the meeting at which such action is considered. One member of the audit committee shall constitute a quorum for the purpose of taking any action. (2) Not applicable. (f) Not applicable. (g) Aggregate non-audit fees billed to the Registrant by the Registrant's accountant was $30,800 for the fiscal year ended December 31, 2003. Aggregate non-audit fees billed to the Investment Adviser by the Registrant's accountant were $3,048,000 and $2,376,000 for the fiscal years ended December 31, 2003 and 2002, respectively. (h) Not applicable. ITEM 5. LISTED COMPANY AUDIT COMMITTEES. At a Board meeting held on June 26, 2003, the Board of Trustees of the Registrant established an audit committee for the purpose of overseeing the accounting and financial reporting processes of the Registrant and audits of the financial 2 statements of the Registrant in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). To be eligible to serve as a member of the Registrant's audit committee, a trustee must be an "Independent Trustee," which term shall mean a Trustee (i) who is not an "interested person," as that term is defined in Section 2(a)(19) of the 1940 Act, as amended of the Registrant; and (ii) who has not accepted directly or indirectly any consulting, advisory, or other compensatory fee from the Registrant (other than fees for serving as a trustee or committee member). The Registrant's Audit Committee Members are: James E. Dalton Margaret M. Eisen Michael M. Knetter Eugene A. Matthews George Morriss ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Board of the Registrant has delegated to the Registrant's sub-advisor (the "Sub-Advisor") the authority to vote proxies on behalf of the Fund and has approved the Sub-Advisor's proxy voting guidelines and procedures. A copy of the Sub-Advisor's proxy voting procedures and guidelines are filed with this Form N-CSR under Item 10. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (a) Within the 90-day period immediately preceding the filing of this Report, the Registrant's Chief Executive Officer and Chief Financial Officer have each evaluated the effectiveness of the Registrant's "Disclosure Controls and Procedures" and have concluded that they were effective. As such term is used above, the Registrant's Controls and Procedures are controls and other procedures of the Registrant that are designed to ensure that information required to be disclosed by the Registrant in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure Controls and Procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Registrant in such reports is accumulated and communicated to the Registrant's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. (b) There were no significant changes in the Registrant's internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 10. EXHIBITS. (a) Code of Ethics is attached. (b) Proxy voting procedures and guidelines are attached. (c) Certification letters are attached. (d) Section 906 Certifications are attached. 3 Pursuant to the requirements of the Exchange Act and the 1940 Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Lehman Brothers/First Trust Income Opportunity Fund By: /S/ Bradley Tank ------------------------------------------------------ Bradley Tank, President/Chief Executive Officer Date: March 3, 2004 Pursuant to the requirements of the Exchange Act and the 1940 Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /S/ Bradley Tank ------------------------------------------------------------------- Bradley Tank, President/Chief Executive Officer Date: March 3, 2004 By: /S/ Edward Grieb ------------------------------------------------------------------- Edward Grieb, Treasurer/Chief Financial Officer Date: March 3, 2004 4